Consumption Tax Increase Reversed?

In December, Japan’s ruling parties have agreed that all food products will remain at 8% when the general consumption tax rate rises to 10%. Now the work will begin on identifying what food products will qualify for the reduced rate and what food products are restaurant foods. The cost of the reduction will be approximately 1 Trillion Yen and so cuts will be made to Social Security and other undisclosed measures to fund the tax cut.

Now a key architect of Abenomics, Esturo Honda, is recommending instead of increasing the consumption tax to 10% it should be decreased to 7%. The finance minister and other members of the cabinet want the tax increase to go ahead to slow down Japan’s public debt.

A full invoicing system will not be part of the Consumption Tax until 2021 based on the agreement between the parties but instead a simplified system will come into place with the introduction of the reduced rate.

If there is a delay or reduction, this could impact the earlier reached deal which left food taxed at 8%. Would this now fall back to the old rate of 5% or would Japan retain the rate of 7% for all product. If this occurs then invoicing system agreed upon by the major parties will no longer be necessary.

As noted earlier figuring out what foods qualify for a reduced rate can lead to sometimes interesting distinctions. It seems likely there will be rulings from the tax department examining packaging in the coming months and years to determine when something will be subject to the reduced rate similar to this: http://www.cra-arc.gc.ca/E/pub/gm/4-3/4-3-e.html#_Toc155586118. What will complicate it will be making the distinction between restaurants and take-away establishments which have become difficult in some countries depending on the seating quality of the take-away establishment.

Although there is little political will to carry out the tax increase, IMF has been consistently pushing for Japan to increase it consumption tax rate. The IMF outlined three reasons to increase the Consumption Tax rate in this 2011 Report:

a. Stable source of revenue in an aging society

b. distributes tax burden more equitably across current groups

c. less detrimental to growth compared with other taxes

The third point is important because the ruling party has announced reductions to the corporate income tax rate from 32.11% to 29.74% in FY2018. The government wants Japanese corporations to spend some of their cash pile for investments which will further help spur economic growth in Japan.

The constantly changing directions on the consumption tax could also be fueling the lack of consumer spending.